Competitors’ currencies will continue to weigh on the grain markets in 2016, as will large global stockpiles that show no signs of shrinking.
Throw in a wild card — Argentina — and the prospect for farm-gate prices returning to profitable levels seems difficult.
DTN Senior Analyst Darin Newsom said there’s potential for a late-winter rally, but it would take a large-scale supply shock somewhere in the world to break grains out of their sideways trading range in 2016.
“Farmers need Aaron Rodgers as their marketing guru, their marketing quarterback,” Newsom said, referring to the two successful Hail Mary passes the Green Bay Packers’ quarterback threw in a recent NFL playoff game.
“If a rally is going to happen this winter, it’s going to be because everyone’s still holding tight (to physical grain), demand stays OK, and something happens to either slow South America’s harvest coming in or it’s just not as large as expected, so we continue to see commercial demand,” Newsom said.
Otherwise, corn, wheat and soybeans are looking at another low-volatility, range-bound trading year without a supply-side Hail Mary.
U.S. exports will likely be handcuffed by our competitors’ currency advantage, which will add to already large domestic stockpiles as farmers prepare to sow another crop.
“We continue to increase supplies despite the fact that prices are going down,” Newsom said. The problem is broader than just grains. It’s a big part of why crude oil is trading at its lowest level in more than a decade. “It’s all about supplies. Market after market, sector after sector. We’re looking at a supply situation.”
LATE-WINTER RALLY POTENTIAL
Newsom thinks late winter is a more likely timeframe for a rally than spring this year, and he thinks it could have just started in soybeans.
“It may not be very big, particularly in corn,” he said.
Underlying a potential rally will be a shift in the futures positions of noncommercial traders. That trading sector, which Newsom has dubbed Watson for its reliance on computer-assisted trade, currently holds large net-short positions in the corn and soybean markets.
That’s changing, most prominently in the soybean market where noncommercial traders cut their net-short position by more than 13,000 contracts last week (Jan. 11-15).
“There’s a correlation between production numbers and Watson’s movements,” Newsom said. He expects production forecasts for Brazil to decline, which would lead noncommercial traders to buy and reduce their net-short positions.
Steve Nicholson, a grains and oilseed analyst with the Rabobank Food and Agribusiness Research and Advisory group, said farmers should do some scenario planning and know what they would do in different situations.
“You have to think about — what are those opportunities? And if you do get one, you better have a good reason NOT to do something, in my view,” he told DTN. “Let’s say the futures market does pop up to $4.20 or $4.25. Is it there because it’s rained a little bit in spring, or is it there because we’ve been dry for a month and we don’t see anything going forward that looks any wetter?”
Nicholson suggests putting orders in with your local grain buyer at your breakeven price or better. Volatility is likely to be low in 2016, and that “gives you limited opportunities to take advantage of upsides or downsides. So you’ve really got to be paying attention,” he said. “Placing orders sounds really simple, but its little simple tactics that can make a difference in a year like this.”
Newsom cautions that any rally could be quick. “You may not want to be the first one to pull the trigger, but you certainly don’t want to be the last.”
The U.S. dollar made its big move in 2014. It didn’t do much in 2015, but remained the talk of the commodity world.
“The overriding issue of the dollar is that the dollar may have stabilized, but the fact is our major competitors’ currencies — Brazil, Argentina, Russia and Ukraine — continue to depreciate against the dollar,” Nicholson said.
That makes U.S. products more expensive in the global marketplace while making competitors’ products cheaper. It’s already been felt in the corn and soybean markets, where USDA forecasts for exports are down 164 million bushels and 153 mb respectively from 2014-15.
Newsom thinks 2015-16 exports could fall even further since shipment and sales data is lagging last year by more than USDA’s estimates show.
The wildcard in this scenario is Argentina, Nicholson said. The new president allowed the peso to devalue and he eliminated export taxes on corn and wheat while cutting the soybean export tax by 5%.
“That’s going to make Argentina more competitive in the world,” he said. “When you look at their products, (soybean) meal and oil, and wheat and corn, they’ve been off the radar screen for quite a while from the export perspective, but now that’s one of those things that you need to pay attention to.”
U.S. soybean meal exports are down 15% so far in 2015-16, and 76% of the reduction is attributed to fewer sales to Europe, DTN Analyst Todd Hultman said.
At the same time USDA cut its forecast for U.S. exports by 136,000 tons, it increased its forecast for Argentina’s soybean meal exports by 450,000 tons.
“I think we can assume where Europe is getting their meal from,” Hultman said.
Newsom said he thinks the U.S. will continue to struggle with increased export competition under comparative strength of the U.S. dollar.
“Until that thing turns down and our supplies start to look better on the world stage it’s going to be hard,” he said.
SWIMMING IN STOCKS
To gauge how comfortable supplies are, Newsom likes to compare ending stocks to overall usage. The U.S. stocks-to-use ratios for corn and soybeans are at 13.3% and 11.9%, respectively, both fairly large numbers historically. Wheat is at an astounding 47.5%.
Global stockpiles are even larger, with the stocks-to-use ratios running at 21.6% for corn, 25.2% for soybeans and 32.4% for wheat.
“We’re in a new situation right now where there’s really only one thing that matters, and that’s supplies,” Newsom said. That’s why all eyes will be on March’s Prospective Plantings report.
Early acreage estimates from private analytical firm Informa Economics see farmers planting 88.9 million acres of corn and 85.2 ma of soybeans. The corn acreage estimate is a slight decline from its earlier estimate, but it’s still larger than last year. The soybean acreage number is higher than last month and 2.6 million more than last year.
That means another year of large crops could be in the cards. Using trend yields, corn production could, once again, be slightly less than 14 billion bushels and soybean production just shy of 4 bb.
“If we do have a drought, or a flood for that matter, it’s going to have to be some kind of catastrophic supply side issue to drive the markets higher because we have plenty of stocks of everything,” Nicholson said.
He has little hope corn demand could become a white knight with exports challenged and feed use and ethanol use likely to hold steady. Soybean demand could be a little better. While the rate of China’s increase has declined, its demand for soybeans continues to grow.
“The other overriding theme I look at in 2016 is that farmers — and suppliers to farmers, input suppliers — all are going to be facing a very different economic environment than we’ve had for quite some time,” Nicholson said.